With the FTSE 100 close to an all-time high, are UK markets heading for a fall?

Jason Hollands, managing director of Tilney Bestinvest, says Yes.

While it’s incredibly difficult to accurately call the top of a market, what we do know is that equities never rise relentlessly in a linear fashion, and the current bull market has run on for a very long time now, despite the headwinds of weak global growth and a deteriorating outlook for dividends.

The latest surge in the FTSE 100 has been fuelled by renewed weakness in sterling and, of course, behind this is the octane of yet more QE and record-low interest rates. While these factors provide some near-term support for UK equities, I believe that, ultimately, asset prices across the globe will have to realign with economic reality and risk will be repriced.

There are plenty of event risks on the horizon, including the US elections, concerns about the health of Europe’s banks, monetary tightening by the Fed, worsening relations between Russia and the West and a potential bursting of China’s credit bubble. So behind this soaring stock market is a very fragile world built on the sands of central bank alchemy. That makes me very cautious.

The FTSE 100 is within a whisker of last April’s all-time high. Irrational exuberance? I don’t think so. The blue-chip index is international, full of exporters and overseas earners for which the slide in the pound is a bonus. It makes our goods and services more competitive and the value of foreign-earned profits is higher on translation. Now the phoney war since the referendum is over, the pound could fall further.

What about the FTSE 250? As a domestically-focused index, you might have expected concerns about the UK economy to act as a headwind. But it is rising on hopes that chancellor Philip Hammond will support the Bank of England with fiscal as well as monetary stimulus.

The UK market is more expensive than Europe and Japan but cheaper than the US. Its dividend yield of close to 4 per cent is a high and growing source of income. The FTSE 100 is no higher than it was nearly 17 years ago. There is no reason why it shouldn’t move higher.

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